Friday, May 8, 2009

In a regular business recession, businesses that over-expanded whittle down their excess inventory, and reinvest capital in more profitable lines. Once inventories are at a more sustainable level and capital redeployed to more appropriate endeavors, growth should come back.

What the US has now is a capitalist recession. In this particular recession, investor/capitalists over-invested in speculative assets and mostly funded these purchases with massive debt. Before growth will come back, debt levels will have to be paid down. But how can debt be paid down if the investment was in non-income generating assets that have, at best, now come down in value, or at worst, unsellable?

To recover from debt, capitalists have had to hoard capital and cut down private consumption. Ditto their lenders, who also have had to swallow massive writedowns, now also hoarding capital and cutting private consumption.

So viable businesses, if there are any left, starve from a lack of capital, while most barely survive from the loss of consumers. This leads to more hoarding and clampdown on consumption. So where can “green shoots” of recovery come from?

Certainly not from the economy in capitalist recession. As we’ve mentioned many times before, you will have to look to those economies that have not been profligate with spending and borrowing - economies who have merely had a business recession.

Once inventories in these economies have come down to more sustainable levels (given the lowered demand) and capital redeployed to more appropriate endeavors (businesses that stimulate domestic consumption), growth should come back. Not just to these economies, but eventually, to economies in capitalist recession.

Look for these green shoots in the emerging markets. But be patient. It will take years for these shoots to become noticeable.

Now, it is possible for the US, being a hothouse for technology, to sprout green shoots by solving current problems in health care, alternative energy, and environmental care. But given the capital hoarding going on there, the capital will have to come from Asia.

3 comments:

Anonymous
said...

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Please name the "economies that had merely had a business recession" Please let me know what type of businesses are you referring to, It is hard to guess or distinguish since everyone is feeling the recession pain.Thank you,Victoria Alwaysvictoria@allaboutdreamhomes.com

China, Korea, Thailand, Indonesia....etc. These are economies where there wasn't an asset bubble in the same magnitude as the US, and hence no capitalist recession at this time. But they are now undergoing a business recession, because they have production capacity for a world market that now no longer has the same level demand.

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"Conventional approaches, unconventional conclusions" on the global finance and economic issues of the day. Rogue Econ has been a banker and financial consultant in several countries. Welcome to my blog.